State of the 340B Program

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The 340B Drug Pricing Program, commonly referred to in the industry as simply the “340B Program,” has been an important component of the United States’ health care delivery system since its inception in 1992. Nevertheless, diverging stakeholder interests and the desire to maximize the benefits of the 340B Program have resulted in a series of legislative efforts and litigation aimed at curbing program abuse and clarifying its appropriate use.

Background

In the early 1990s, Congress created the Medicaid drug rebate program (MDRP) to lower the cost of pharmaceuticals reimbursed by state Medicaid agencies. The MDRP requires drug companies to enter into a rebate agreement with the Secretary of the Department of Health and Human Services (HHS) as a precondition for coverage of their drugs by Medicaid and Medicare Part B. Under the MDRP, a drug company must pay rebates to state Medicaid programs for “covered outpatient drugs,” as defined in the Medicaid rebate statute. The rebate amount for a brand-name covered outpatient drug is based in part on the manufacturer's “best price” for that drug.

In 1992, in passing Section 340B of the Social Security Act, Congress extended the same kind of relief to certain “safety-net” providers of health care services (covered entities). Similar to the MDRP, Section 340B requires drug companies to enter into an agreement (PPA), by which the drug company agrees to provide front-end discounts on covered outpatient drugs purchased by covered entities serving the nation's most vulnerable patient populations. According to congressional report language, the purpose of the 340B Program is to enable covered entities “to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”

In the years since its inception, the Health Resources and Services Administration, through the office of Pharmacy Affairs (hereinafter referred to as HRSA), has released regular guidance clarifying various components of the 340B Program.

First, in 1996, HHS published a notice generally clarifying the definition of “patient” to mean an individual in situations where: 1. the covered entity has established a relationship with the individual, such that the covered entity maintains records of the individual's health care; 2. the individual receives health care services from a health care professional who is either employed by the covered entity or provides health care under contractual or other arrangements such that responsibility for the care provided remains with the covered entity; and 3. the individual receives a health care service or range of services from the covered entity which is consistent with the service or range of services for which grant funding or Federally qualified health center look-alike status has been provided to the entity. One important aspect of the guidance is clarification that an individual will not be considered a ‘patient’ of the entity for purposes of 340B if the only health care service received by the individual from the covered entity is the dispensing of a drug or drugs for subsequent self-administration or administration in the home setting.

Another important update to the 340B Program came in 2010 with the passage of the Patient Protection and Affordable Care Act (ACA), which significantly broadened the list of entities eligible to participate in the 340B Program as “covered entities.” The additions include children's hospitals, cancer treatment facilities, critical access hospitals, rural referral centers, and sole community hospitals that have a certain Disproportionate Share Hospital percentage. Since this change, hospital participation in the 340B Program has tripled to include more than 53,000 registered sites.

Also in 2010, HRSA implemented a policy change altering how covered entities can engage with contract pharmacies for filling 340B medications. Previously, covered entities without an in-house pharmacy were restricted to contracting with a single external pharmacy. However, the new policy allowed covered entities to contract with an unlimited number of outside contract pharmacies. This policy shift resulted in a more than ten times increase in contract pharmacies participating in the 340B Program.

Contract Pharmacy Dispute

In the summer of 2020, drug companies sought to restrict available discounts for drugs dispensed through contract pharmacies. Actions by the drug companies were aimed at limiting covered entities to distribution to one contract pharmacy. Drug companies contended that the restrictions were necessary to prevent duplicate discounting and diversion of 340B Program drugs to individuals who do not meet the definition of “patient” under the 340B Program.

HRSA responded to the restrictions in 2021 by issuing violation letters to manufacturers, informing them that their policies violated the 340B Program statute and threatening civil money penalties if they continued. In response, some drug companies sued HHS to challenge its authority to issue the letters, arguing they violate the Administrative Procedure Act and constitute an unconstitutional taking under the Fifth Amendment. The cases turned on HHS's interpretation of the 340B statute, which is silent as to the role of contract pharmacies in the 340B Program. Two of the courts ruled that HHS acted within its statutory authority in issuing the violation letters, while two others disagreed. Three of the cases were appealed to the Courts of Appeals for the Third, Seventh, and D.C. Circuits.

The Third Circuit's decision on appeal focused on two issues: whether the 340B Program statute permits drug manufacturers to limit covered entity drug purchases that are distributed by contract pharmacies and whether the statute gives HHS the authority to stop such practices. Similarly, the D.C. Circuit reviewed the D.C. District Court's order setting aside HHS's violation letter. The issue on appeal was whether HHS's enforcement letter was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” under the Administrative Procedure Act.

In reaching its decision in favor of drug companies, both the Third and D.C. Circuits began by considering the language of the 340B Program statute. The Third Circuit reasoned that the policies of drug companies restricting contract pharmacy use were lawful because “[n]o . . . language in Section 340B requires delivery to an unlimited number of contract pharmacies.” The D.C. Circuit's opinion further pointed out that the Secretary of HHS “lacks rulemaking authority over the 340B Program.”

In response to these two opinions, seven states have passed laws requiring manufacturers to honor discounts at all contract pharmacies within the state or face civil or criminal penalties. These states are Arkansas, Kansas, Louisiana, Maryland, Minnesota, Mississippi, and West Virginia. Although there are numerous ongoing lawsuits, an 8th circuit court ruling on the Arkansas law sided against the drug companies and allowed the state law to stand. And, on December 9, 2024, the U.S. Supreme Court declined to take up a petition by a powerful pharmaceutical industry lobbyist urging the Court to review a decision by the U.S. Court of Appeals for the Eighth Circuit against drug companies.

Rebate Model Litigation

More recently, several drug companies filed three lawsuits in 2024 against HHS and HRSA challenging HRSA's oversight of the 340B Program, specifically as it related to the newly proposed rebate models (as opposed to the long-standing point-of-sale discount model). Drug companies have argued that allowing the transition to a rebate model would curb fraud, waste, and abuse by providing a chance to ensure that the drugs are eligible for 340B. HRSA had rejected the proposed new plans, due in part, partially, to the concerns raised by covered entities, including that the rebate proposals would place cash-strapped safety-net hospitals, many of which operate on thin margins, on the hook for substantial upfront payments. Rebate models could also create challenges with respect to certain payer billing requirements, such as Medicaid requirements for 340B Program providers to identify 340B Program claims using claims modifiers.

In May 2025, the D.C. District Court found that “HRSA did not act contrary to law by requiring the plaintiffs to obtain approval before implementing their proposed rebate models.” Since HRSA is still considering rebate models from several drug companies and has not formally rejected them, the court was unable to find that regulators acted arbitrarily or capriciously in reviewing the proposals, according to the order. Notably, the decision did not issue any conclusion that rebate models are expressly prohibited under the 340B Program, which is viewed by some as a partial win for drug companies. Then, on June 27, 2025, in another case, the D.C. District Court ruled against the drug company and sided with HHS and hospitals.

Executive Order

A new executive order signed by President Trump may lead to HHS cuts on Medicare reimbursements for 340B hospitals. On April 15, 2025, President Trump issued an Executive Order titled “Lowering Drug Prices by Once Again Putting Americans First.” As a part of that executive order, the President ordered the Secretary of the HHS to “publish in the Federal Register a plan to conduct a survey under section 1833(t)(14)(D)(ii) of the Social Security Act to determine the hospital acquisition cost for covered outpatient drugs at hospital outpatient departments” within 180 days. After which, “the Secretary shall consider and propose any appropriate adjustments that would align Medicare payment with the cost of acquisition.” Although this Section does not specifically reference the 340B Program, the order to conduct a survey signals that there may be Medicare reimbursement cuts for 340B Program drugs for covered entities.

In 2018, during President Trump's first term, the Department of Health and Human Services (HHS) cut Medicare drug reimbursement rates for 340B hospitals by 28.5%. HHS implemented this change because it believed the 340B discount was too high and Covered Entities were benefitting from the program. Litigation ensued over the cut, which eventually reached the Supreme Court. In Am. Hosp. Assoc. v. Becerra, 596 U.S. 724 (2022), the cuts on Medicare reimbursement were unlawful. The Court took this position because HHS had not conducted a survey before making the cuts, which is required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

President Trump's Executive Order requires HHS to conduct the survey that the Court ruled was required in order to reduce the reimbursement rates for 340B Program institutions. Thus, the Executive Order is a strong indicator that the current administration intends to lower those reimbursement rates again, which could have a substantial impact on 340B covered entities and their patients.

Should a reimbursement reduction be implemented, 340B Covered Entities may face financial difficulties, and competing Hospitals may stand to benefit. Hospitals have already been having economic difficulties, with operating margins decreasing from 2021 to 2024. Because of this, 340B reimbursement cuts could have a serious impact on 340B Hospitals’ financial outlook.

On the other hand, competing non-340B hospital and independent physician practices may benefit from a potential boost in reimbursement payments for non-drug services that may accompany the 340B reimbursement cuts. Additionally, a decrease in the profitability of hospital-based drug administration may lead to an increase in drug administration by independent physician groups.

What's Next?

Unsettled litigation surrounding manufacturer rebate plans and the use of contract pharmacies continues to create uncertainty about the future direction of the 340B Program. And the enactment of state laws, many of which are provider-friendly, adds even more unpredictability.

The “One Big Beautiful Bill”, signed into law in early July 2025, adds more considerations to an already complicated regulatory environment. Among its provisions that are most relevant for pharmaceutical manufacturers and the 340B Program are certain exclusions that would spare orphan drugs from the Inflation Reduction Act's (“IRA”) drug price negotiation program. Before the new law, the IRA only excluded orphan drugs that have a single indication, but this protection is lost after winning a second orphan drug designation. Now, the policy package precludes pricing negotiations for orphan drugs even with multiple such designations. The countdown for when an orphan drug is opened up for negotiations starts only after it is approved for a non-rare indication.

The steep cuts to Medicaid will likely create substantial issues with provider reimbursement. The package imposes new work requirements to qualify for the program while also tightening the overall Medicaid budget, which could curtail health services, particularly in rural communities. These Medicaid cuts could also endanger the 340B status of several hospitals. The program, which allows providers to dispense drugs at a discount to certain outpatients, requires hospitals to treat a minimum number of Medicaid patients. Even for hospitals that continue to treat a minimum number of Medicaid patients, if manufacturers’ rebate models are implemented, the providers may experience even deeper cash flow issues.